By Eric Lascelles, RBC Global Asset Management
China now commands the world’s attention, having transformed itself into an economic superpower that generates a startling one-third of global economic growth. In a growth-scarce world, the thought of losing even a smidgen of this is unsettling.
For this reason, it is of crucial important to track the constellation of vulnerabilities and unknowns that orbit China. Among these, the country’s housing market is a subject of disproportionate importance. This is due to its centrality, its sheer heft, and also its seeming vulnerability.
Housing acts as something of an economic fulcrum that exerts an outsized influence over China’s banks, heavy industries, builders and households. We figure it is directly or indirectly responsible for a whopping 19 per cent of China’s economic output. Read more
News that Ikea is rolling out an online shopping platform in China – its first in the Asia-Pacific region – could be a sign that Western retailers are at last reacting to rising costs and shifts in consumer shopping behaviour. But what has taken them so long?
Despite operating online models successfully in the UK and other parts of Northern Europe, it has taken Ikea seven years to get to a similar point in China. With stores in major cities including Shanghai and Beijing, Ikea has followed a similar strategy to many other Western retailers; investing in bricks and mortar outlets in China’s thriving tier 1 and 2 cities.
However, consumer demand has been growing right across China and while rising costs remain an issue, Western retailers urgently need a strategy to develop this market potential. Read more
By Anthony Chan, Brad Gibson, Jenny Zeng, AllianceBernstein
Issues coming to a head in China’s corporate sector require its government to decide how much freedom to allow the markets and private business. The risk? That policymakers will duck the issues, leaving the economy to drift.
Let’s take a deeper dive into three notable developments that serve as a guide to the direction of China’s economy and its reform agenda.
Dongbei Special Steel (DSS)— a steelmaker majority-owned by the Liaoning provincial government— recently defaulted on a Rmb64.4m ($9.6m) interest payment on a privately placed Rmb870m bond issue. DSS is a serial offender: the company has defaulted on seven bonds, totaling Rmb4.8bn in principal. Read more
While China’s rapidly rising debt incites worries among many, China’s leadership seems so determined to meet overly ambitious GDP growth targets that leverage is set to continue to increase steadily. The government targets credit growth of 16 per cent this year, once changes in local government financing are taken into account, and credit expansion so far this year has broadly been in line with that target. Read more
Every country is touchy about some topics, especially when raised by a foreigner. Living in China for almost seven years now, and having been a student of the place for the last forty, I thought I knew the hot buttons not to press. Apparently not.
The topic at hand: high-tech innovation in the People’s Republic of China and why it seems to lag so far behind that of neighboring Taiwan. The current issue of one of China’s leading business publications, Caijing Magazine, published a Chinese-language article I wrote together with China First Capital’s COO, Dr. Yansong Wang, about Taiwan’s outstanding optical lens company Largan Precision. Read more
Speculation is rife that Amazon is soon to establish itself as a global shipping and logistics expert, in a move coined internally as project ‘Dragon Boat’.
While this bold strategy has the potential to significantly increase margins and position Amazon as Chinese businesses’ gateway to the West, a considered and phased implementation is essential if the firm is to gain share of the cross-border e-commerce market from industry leader Alibaba. Read more
By Ken Wong, Eastspring Investments
There is an even chance that, this summer, China’s A-shares will be included for the first time in a key emerging market investment index operated by MSCI, the index provider. If it happens, it will be a welcome development, for the simple reason that it will make the benchmark a more accurate reflection of the emerging market corporate universe.
While the immediate impact of inclusion would be quite small, the longer-run potential for A-shares – which are the stocks of companies listed inside mainland China – to grow in importance within the index is enormous.
Two obstacles to inclusion have been largely removed – reforms to a quota system on investment inflows from abroad and a shortening of the delay in repatriating capital out of China. Read more
You don’t hear much these days about capital outflows from China. The renminbi seems well behaved, and China’s foreign exchange reserves have stayed stable in the past couple of months. Sure, the economy itself faces a bunch of challenges, as the government hasn’t quite found a way to maintain rapid growth rates without a dangerous degree of reliance on credit. But you don’t get the sense that the Chinese are falling over themselves in a rush to buy dollars.
The Fed might take heart from this. On two occasions in the past year, the US Federal Reserve’s intentions to raise interest rates have been confounded by financial turbulence caused by large outflows from China. The first was last summer, when the Fed was forced to postpone rate hikes following a surge in flows from China after the People’s Bank of China (PBoC) introduced a new regime for fixing the renminbi on August 11th. The second was this winter, when another surge in outflows that coincided with the Fed’s December rate hike made it impossible for the Fed to keep doing so. Read more
By Michelle Chan, VP of Programs, Friends of the Earth US
As chair of this year’s G20, China is mounting an ambitious campaign to promote ways that the banking sector can not only green the Chinese economy, but the global economy too.
Over the past decade, China has prioritised sustainable finance policies as a means of preventing and controlling pollution via its banking sector, leading many to hope that China can lead the world on a greener path towards sustainable finance. The members of the G20 Green Finance Study Group, meeting next month in Xiamen, are certainly betting that China does have something to offer when it comes to green finance.
But have such Chinese finance policies actually led to concrete improvements for the environment? Read more
By Jon Harrison and Trey McArver of Trusted Sources
The prospects for structural economic reform in developing Asian nations is being significantly constrained by the problems political leaders are experiencing in implementing their agendas. Conversations over the past month with policymakers and analysts in China, India, Indonesia, the Philippines and Thailand have brought out common themes on the progress towards sustainable growth and structural improvement.
Governments across the region have had mixed success in boosting growth. All five countries have seen growth decline to levels below that of 2010. External factors have been a major driver of the economic slowdown but domestic conditions have played a part as well. China is slowing due to unavoidable economic rebalancing and is likely to remain a major drag on regional economies for at least the next two years. Read more
By Philippe Le Corre and Joel Backaler
This year has all signs of becoming another bumper year for Chinese overseas mergers and acquisition activity. In the first three months alone, the total value of cross-border deals nearly reached 2015 annual totals ($101bn and $109bn, respectively).
High-profile deals from the last three months include: Dalian Wanda’s $3.5bn acquisition of Legendary Pictures, a US media company, Haier’s $5.4bn takeover of GE’s appliances unit and most notably ChemChina’s record-setting $43bn bid for Syngenta, a Swiss-based agri-business group.
However, all of this overseas business activity is occurring against a backdrop of a Chinese domestic economy that is facing myriad challenges with a slower GDP growth forecast of 6.5 per cent, reduced domestic demand and decreasing industrial profits not to mention industrial overcapacity. Read more
By Mark Schwartz, Goldman Sachs
In the 1990s, trade was the defining issue of the US-China economic relationship. Today, as much as any other issue, the environment binds the two giants of the global economy together.
This week, leaders from the international financial community are gathering in Shanghai for preparatory meetings in advance of the G20 summit in Hangzhou this September. Among the most prominent items on the agenda is green finance– public and private investment in environmental protection and climate change mitigation. Read more
With about every major leading economic indicator in a tailspin, it’s easy, even obvious, to be bearish about China. But, one sign of economic activity could hardly seem more robust: the crowds and cash at gambling tables during this year’s Chinese New Year.
The two-week long lunar New Year celebration finally drew to a close on Monday with the Lantern Festival. Here in Shenzhen, China’s richest city per capita, no sooner do the shops all shut down for the long break than the gambling tables spill out onto the street, like the cork flying out of a bottle.
Gambling, especially in public places with large sums being wagered, is illegal everywhere in China. All the same, the New Year is ready-made for gamblers and street-corner croupiers to gather. For one thing, most police and urban street patrols are also away from their jobs with family. Read more
By Michel Lowy, SC Lowy
Traditionally, investing in Asian high-yield bonds has not been for the faint-hearted. Yet in recent years a new normal emerged; just about any bond delivered strong returns. Such has been one of the results of the extremely accommodative policies of major central banks that have flooded the markets with liquidity, thereby dulling the perception of risk.
However, all this changed last year when steep falls in oil and commodities prices,
together with US high-yield fund redemptions, led to a liquidity shakeout
in the high-yield bond market. The new reality rewarded a discriminating investment strategy – with the Chinese property sector’s high yield bonds returning gains of 20 per cent, even as other market segments such as Indian issuers and Chinese industrials experienced single-digit losses. Read more
By Weifeng Zhong and Zhimin Li
The falling value of China’s yuan has once again become a trigger for state intervention. Fueled by a whopping $1tn in capital outflows last year, downward pressures on the renminbi have prompted the Chinese government to defend the currency by burning $700bn of its foreign-exchange reserves and rolling out a barrage of administrative measures. The latest reserves plunge shows that the government is losing the fight.
While capital flight is a headache for Chinese officials long fixated on managing the renminbi’s value, it may be good news for the rest of the world. As we explain later, it could well mean that the serious economic reforms outlined in China’s new five-year plan, such as deregulations, tax cuts, and other pro-market policies, might become a reality. Read more
By Hayden Briscoe and Anthony Chan, AllianceBernstein
The liberalisation of China’s currency and capital account is under threat as the renminbi falls, capital outflows intensify and foreign reserves dwindle. Will the country forge ahead with its reforms or pause to allow the market to settle down? Both, in our view, have their pros and cons.
China’s policymakers face a major conundrum: as the renminbi’s volatility has increased, capital outflows have intensified and depletion of foreign reserves has accelerated (down some $663bn from their June 2014 peak) as a result of market intervention to stem the renminbi’s precipitous decline.
Consequently, Beijing needs to address the “impossible trinity” problem — that is, the fact that no government can control interest and exchange rates while allowing free capital flows. Read more
The Chinese are watching a new storm unfold in their financial markets, only months after being bombarded with news of their country’s “historical victory” when the renminbi was designated an official reserve currency under the IMF’s SDR regime in November.
Inclusion in the SDR has turned out to be a pyrrhic victory, as China’s capital outflows have only accelerated. China lost as much as $108bn in foreign reserves in December, despite a record trade surplus of over $60bn. From a peak of nearly $4tn a year and a half ago, it is now left with $3.33tn in foreign reserves. Read more
“Living in a world strewn with the wreckage of the Soviet empire it is hard for most people to realise that there was a time when the Soviet economy, far from being a byword for the failure of socialism, was one of the wonders of the world – that when Khrushchev pounded his shoe on the UN podium and declared, ‘We will bury you’, it was an economic rather than a military boast”. Paul Krugman (1994)
When in 1959, Nikita Khrushchev visited the Unites States, the spectacular economic growth recorded by the Soviet Union was commonly regarded as a challenge to the supremacy of the western model of democratic capitalism. Impressive statistics, such as its manufacturing output of tractors, mesmerised western opinion formers. Newsweek warned that the Soviet Union might well be “on the high road to economic domination of the world”. Read more
By Ronald Cheng, Bingna Guo, Sean Wu, O’Melveny & Myers
Chinese companies are by no means immune from the cyber attacks plaguing firms all over the world. More and more are suffering data breaches, which can result in the leakage of customer information, the denial of service, and the prospect of litigation. In July 2015, the national cyber-security emergency response unit received reports of some 11,800 “cyber incidents”. Xi Jinping, the president, has made cyber security an issue of national security.
Partly in response to such mounting cyber security issues, the Chinese government adopted the National Security Law on July 1, 2015. The law for the first time addressed the concept of cyber security and advocated the prevention and punishment of online crime, but did not specify particular measures or punishments. In addition, the law mandated the “national security review and oversight” of all “internet information technology products and services,” naming a pretty broad swath of industries that could be facing more government scrutiny. Read more
China’s economic growth surprised on the upside in the third quarter. Yet markets will probably remain fixated on the economy’s slow-down and on the devaluation of the renminbi in August. We are in a world where volatilities rule, economic opinions differ and geopolitical conspiracy theories abound.
The mainstream view on the Chinese economy is that it will slow considerably, and only return to healthy growth if it can be “rebalanced” away from investment and exports to a household consumption-driven model. This view is incomplete at least, and misguided in some aspects.
The Chinese economy, over the next two decades before China becomes a high-income country, will be driven by four engines. Read more